BASF reports higher profits, cautiously optimistic on 2014

19:13 PM | March 3, 2014 | —Natasha Alperowicz in Ludwigshafen

Briefing the press: Hans-Ulrich Engel(l) and Kurt Bock (c) outline strategies at Ludwigshafen.

BASF has announced higher fourth-quarter and full-year 2013 earnings and says it is cautiously optimistic about the year ahead. Fourth-quarter net income rose 16.3%, to €1.14 billion ($1.57 billion), on flat sales, €18.2 billion. Full-year net income was €4.84 billion compared with €4.82 billion in 2012 on sales up about 3%, to €74.0 billion. Ebit before special items in the fourth quarter was 18.1% higher, at €1.45 billion, and up 8.2%, at €7.19 billion, in 2013.

In 2013 BASF earned a €1.9-billion premium on the cost of capital, just short of the annual target of €2.0 billion.

In a press briefing, held at Ludwigshafen on 25 February, Kurt Bock, BASF chairman, said that 2013 was a demanding year, with significant headwinds against the industry compounded by negative currency effects in numerous emerging markets and Japan. BASF nevertheless has achieved its goals for the year. “We were able to increase sales and earnings in 2013 compared with the previous year. We sold more, worked more closely together with our customers, and enhanced our portfolio,” Bock says. The sales increase in 2013, mainly volume-driven, was due mainly to the performance of the oil and gas and agricultural solutions segments. Sales declined slightly in the chemicals business—which includes the chemicals, performance products, and functional materials and solutions segments—despite higher volumes.

Bock said recently that BASF wants to acquire businesses that generate profitable growth above the industry average, are innovation-driven, offer a special value proposition to customers, and reduce earnings cyclicality. BASF’s recent acquisitions of this type include Pronova BioPharma, an omega-3 fatty acid player; Henkel’s enzyme technology for detergent and cleaning formulations; and Verenium, a company that develops enzymes, especially for human and animal nutrition. BASF will supply omega-3 fatty acids made by Pronova to pharmaceutical companies for use in cardiovascular pharmaceuticals sold under prescription.

BASF has ambitious targets for its battery materials business, and Bock, in response to a CW question, said that acquisitions may form part of the company’s battery material growth plans. BASF aims to achieve €500 million in battery material sales by 2020, including €350 million in Asia/Pacific. This business is relatively small at present. The worldwide battery materials market today is worth more than €5 billion/year, of which about €4 billion is in Asia/Pacific.

Bock, asked repeatedly about how BASF plans to take advantage of the US shale gas revolution, said that dramatic changes are taking place in the worldwide chemical industry because of shale gas in the United States and the increasing use of coal as feedstock in China. “Shale gas gives a competitive edge, and we want to participate—and will participate—in the shale development in the US in the future,” he says.

BASF CFO Hans-Ulrich Engel says that the recent conversion of the Port Arthur, TX, steam cracker from naphtha feedstock to ethane and butane has resulted in the cracker becoming much more competitive. The cracker is a joint venture in which BASF has 60% and Total 40%. Asked whether BASF will participate in a side cracker that Total is planning to build at Port Arthur, Engel said that the project is purely a Total undertaking. BASF, meanwhile, is at the feasibility study phase to build a previously announced ammonia plant in a jv with Yara on the US Gulf Coast. The ammonia unit would be based on cheap US gas. However, BASF does not plan to import shale gas into Europe, Bock says. Most of the company’s Europe-based crackers use naphtha as feedstock, and, although BASF and Total converted the Port Arthur cracker to use gas, BASF needs the fractions it produces in Europe by cracking naphtha. Bock also says that importing gas into Europe would not be as economically attractive as using it in the United States.

In response to a separate CW question about the possibility of BASF this year exiting Styrolution, an equally owned styrenics jv with Ineos, Bock said that BASF is not rushing to quit Styrolution. “We have a put option, which we can exercise this year, but this is not the right time,” he says. Styrolution has achieved many goals, including focus, scale, and cost savings. “We are a happy shareholder; we don’t want to sell in a hurry,” Bock says.

One of the BASF businesses that performed particularly well last year was Other, a unit that mainly includes the Ellba jv with Shell. Ellba produces styrene monomer and propylene oxide in the Netherlands and Singapore. Other does not mean noncore, Engel says. Ellba supplies styrene monomer to Styrolution.

North America is a major focus for BASF. Sales there in 2013 declined by 1%, but Ebit before special items more than doubled, from €116 million to €245 million. Engel attributes much of the increase to the use of cheaper feedstock at the Port Arthur cracker.

Bock, looking ahead to 2014, says BASF “does not expect strong tailwinds. Nevertheless, we are cautiously optimistic with regards to global economic development.... The world economy is expected to grow slightly faster in 2014 than in 2013 despite continuing volatility. We aim to increase our sales volumes excluding the effects of acquisitions and divestitures. Nonetheless, sales are likely to decline slightly compared with 2013 because of the divestiture of the gas trading and storage business planned for the middle of 2014.” The company is looking for a slight increase in Ebit before special items compared with 2013.

The wide-ranging discussion with the press also touched on the fact that Europe is becoming a less and less competitive region for producing chemicals. “In Europe, we have the most expensive energy in the world and are not prepared to use shale. The market here is also stagnating, so the chemical industry is under pressure,” Bock says. BASF’s investments in Europe as a proportion of the group total will also decline. Bock says that BASF typically invests in projects over five-year periods, and that for the next period, Germany, with about 25%, will for the first time account for less than its traditional one-third of the total. Europe will also for the first time be below its traditional 50% of the total.